TAXATION AND THE SECTORAL ALLOCATION OF CAPITAL IN THE U.S.

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Abstract
Since the work of Harberger, it has been widely believed that corporate and personal income taxation in the U.S. causes capital to be misallocated among sectors. This prevailing view has been challenged in recent years by a number of authors who have argued that the corporate tax does not distort the relative returns to corporate and non-corporate investments. Our analysis shows that recent alternative views of corporate tax incidence rest on two assumptions. Specifically, it is assumed that ordinary income can be converted to capital gains only in the corporate sector and that firms have sufficient taxable income to utilize their nondebt tax shields fully. We present evidence that these assumptions are not supported empirically, and discuss the resulting implications for the allocation of capital.

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